Benchmarking Foundation Administrative Expenses: Update on ...

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Figure 5: Charitable <strong>Administrative</strong> <strong>Expenses</strong> as a Share of Qualifying Distributions,2007–2009: Health Conversion <strong>Foundation</strong>s (Staffed Independent <strong>Foundation</strong>s)Giving RangeLess than$5 million$5 millionor moreAllHealth ConversionNon-Health Conversionn=14 18.9%n=319 8.1%n=16 16.6%n=428 7.2%n=30 17.8%n=747 7.7%0% 5% 10% 15% 20%Median PercentageSource: The <strong>Foundation</strong> Center, 2012: The <strong>Foundation</strong> Finances Database (2007–2009). Sample includes 1,171 foundations that rankedamong the approximately 1,900 largest foundations by giving in 2007, 2008, and 2009 for which data were available for all years; qualifyingfoundations gave at least $2 million each year. Of the 1,171 foundations sampled, on average 777 reported having paid staff.Family <strong>Foundation</strong>s’ Lifespan Decisions and Spending LevelsIn general, knowledge is scarce about the lifespan intentions of independentfoundations. However, based on responses to a 2008 <strong>Foundation</strong> Center survey offamily foundations, 175 staffed foundations in this study were coded as limited-life(24), perpetual (95), or undecided (56). 1 For the limited life foundations, the decisionto spend down was associated with lower median expense levels than those of allfamily foundations in the study. The few limited-life foundations had a4 percent median expense ratio, compared with an 8 percent ratio for foundationsthat planned to exist in perpetuity or were undecided. The lower ratios of somespend-down foundations correlate with their non-endowed (pass-through) status. Buteven the largest endowed foundations had very low ratios. Since these foundationshave formally opted to spend out their assets, they presumably had greater flexibilitythan perpetual foundations after the stock market crash to maintain or increasegiving. They were also less likely to add costly infrastructure.1The subset of 175 family foundations for which lifespan intentions were known represented 40 percentof the 441 family foundations in this study. Of the 24 limited-life foundations in the sample, 15 had2007–2009 giving of $10 million or greater, on average. For information about the survey findings, downloadPerpetuity or Limited Lifespan: How Do Family <strong>Foundation</strong>s Decide? (foundationcenter.org/gainknowledge)figure 6: Charitable <strong>Administrative</strong> <strong>Expenses</strong> as a Share of Qualifying Distributions,2007–2009: Family versus Non-Family (Staffed Independent <strong>Foundation</strong>s)Giving Range$50 millionor more$10 million to$50 million$5 million to$10 million$3 million to$5 millionLess than$3 millionn=23n=27n=118n=81n=111n=84n=124n=97n=65n=47Family4.2%Non-FamilyAll n=4416.1%n=33610.2%0% 2% 4% 6% 8% 10% 12%Median PercentageSource: The <strong>Foundation</strong> Center, 2012: The <strong>Foundation</strong> Finances Database (2007–2009). Sample includes 1,171 foundations that rankedamong the approximately 1,900 largest foundations by giving in 2007, 2008, and 2009 for which data were available for all years; qualifyingfoundations gave at least $2 million each year. Of the 1,171 foundations sampled, on average 777 reported having paid staff.5.4%6.3%7.1%7.0%10.2%10.1%9.9%11.3%11.1%Between 2007 and 2009, there wasrelatively little year-to-year change inthe factors that drive expense ratios.Although the three-year average evens outsome marked increases in expense levelsin 2008 or 2009, the underlying patternsremain consistent. The characteristics thatinfluence expenses were the same in eachindividual year and their impact on expenselevels was also very similar.historical trends andstudy implicationsChanges in the economy affect assetand giving levels of foundations andthus the relationship of their expensesto qualifying distributions, but spendingpatterns tend to even out over time.Independent foundations are very sensitiveto stock market trends since their mandatedpayout levels are based on their net assets.After growing robustly through 2007, 8foundation endowments fell victim tothe 2008 financial meltdown (Figure 7).Since giving and payout are driven by assetvaluation in the preceding year (or overa few years), a majority of foundationsreduced their 2009 giving after holdingsteady or increasing giving in 2008.<strong>Administrative</strong> expenses increased by doubledigits in this period, perhaps reflecting adelayed adjustment to five years of solidgrowth in foundation portfolios. 9 Whenexpense levels increase faster than giving, theexpense portion of qualifying distributionsincreases. Between 2007 and 2009, theyearly median expense ratio for staffedfoundations rose slightly. But averaged overthree years, the median ratio for this period,was the same as for 2004–2006 (nearly8 percent).The factors that drive expense levelsof independent foundations were thesame in 2007 to 2009 as they werein earlier periods.For foundations of comparable size, eachof the operating characteristics that had ameasurable effect on expense levels in 2001to 2003 and 2004 to 2006 had a consistentinfluence on expense patterns in this period,even if the median ratios were sometimesa little higher or lower. Thus, the effect ofdifferences in large foundations’ operatingcharacteristics on their spending patternshas now been documented over threeconsecutive but distinct economic periods4 © 2012 The <strong>Foundation</strong> Center—<strong>Benchmarking</strong> <strong>Foundation</strong> <strong>Administrative</strong> <strong>Expenses</strong>
with strikingly similar results. These findingsconfirm the importance of a multi-yearapproach in studying foundation finances.Only a multi-year analysis, repeated overregular intervals and in varying economicenvironments, evens out annual fluctuationsin foundation resources and expendituresthereby providing a more accurate andmeaningful interpretation of foundationspending practices.<strong>Foundation</strong> oversight and regulationwould benefit from deeperunderstanding of the diversity offoundations’ missions and activities.<strong>Foundation</strong>s’ programmatic and strategicchoices affect expenses. Assessing data overtime reveals the typical expense patternsand the extent of outliers. One-size-fits-alllimitations on charitable administrativeexpense levels or target ratios of expensesto-qualifyingdistributions would likely haveunintended consequences for foundationsand the people they serve.components of largeindependent foundations’charitable administrativeexpensesCompensation is by far the biggestcomponent of expenses.Compensation accounted for 46 percentof all charitable administrative expensedollars of the largest independentfoundations between 2007 and 2009(Figure 8). In addition to employee salariesand remuneration of officers and boardmembers, “charitable” compensationincludes pension plans and other benefits.However, it excludes investment-relatedsalaries and expenses.After compensation, the other mainexpense categories by share ofdollars are “other expenses” and “otherprofessional fees.”Between 2007 and 2009, nearly19 percent of large independentfoundations’ expenditures went to eachof the categories “other expenses” and“other professional fees.” In general, otherprofessional fees refers to consulting servicesassociated with grants administration,accounting, evaluation, etc., while otherexpenses is a residual category for expensesthat do not fit into one of the major lineitems on Form 990-PF. But because thesecategories are vaguely defined and are oftenused as catchalls, it is not clear whetherfoundations are using the same line items onForm 990-PF to report the same expenses(see below).The year-to-year distribution of majorexpense items for large independentfoundations is mainly consistent butpatterns have shifted over time.Between 2007 and 2009, compensation’sshare of expenses stayed about even, whileshares of “other expenses” and “otherprofessional fees” increased slightly. Whenthese major items are compared over time,however, a few changes stand out. Notably,between 2004–2006 and 2007–2009,the share of expenses for “other professionalfees” increased from 14 percent to19 percent, while the share for“compensation” decreased from 50 percentto 46 percent. It appears that somefoundations, especially the largest ones, areincreasingly using consultants to managetheir programs. 10Percent ChangeFigure 7: Change in Aggregate Finances for the LargestIndependent <strong>Foundation</strong>s, 2007, 2008, and 200925%20%15%10%5%0% -23.8%-5%-10%-15%-20%-25%2007–082008–092007–096.3%Total Assets-19.0%7.6%-6.0% 1.1% 17.6%Total GivingCharitable<strong>Administrative</strong><strong>Expenses</strong> 1CharitableCompensation 1Source: The <strong>Foundation</strong> Center, 2012: The <strong>Foundation</strong> Finances Database (2007–2009). Sample includes1,171 foundations that ranked among the approximately 1,900 largest foundations by giving in 2007,2008, and 2009 for which data were available for all years; qualifying foundations gave at least $2 millioneach year. The data are not adjusted for inflation.1Charitable administrative expenses and compensation are costs related to the foundation’s charitablemission only; they exclude investment-related expenses.5.0%23.5%15.8%4.5%21.1%Figure 8: Components of Charitable <strong>Administrative</strong> <strong>Expenses</strong>for the Largest Independent <strong>Foundation</strong>s, 2007–2009Compensation46%Other <strong>Expenses</strong>19%Taxes1%Accounting Fees1% Interest1%<strong>Foundation</strong>s with Charitable <strong>Administrative</strong> <strong>Expenses</strong>Printing and PublicationsLegal Fees 1%2%Travel, Conferences, and Meetings5%Occupancy6%Other Professional Fees19%Source: The <strong>Foundation</strong> Center, 2012; The <strong>Foundation</strong> Finances Database (2007–2009). Includes 1,029of the 1,171 foundations sampled that reported charitable administrative expenses. These are costsrelated to a foundation’s charitable mission and exclude investment-related expenses. The data are basedon a three-year average for 2007 through 2009. One hundred and forty-two large foundations did nothave any charitable administrative expenses.5 © 2012 The <strong>Foundation</strong> Center—<strong>Benchmarking</strong> <strong>Foundation</strong> <strong>Administrative</strong> <strong>Expenses</strong>77.0%
Page 2: KEY FINDINGSOperating Characteristi
Page 7: endnotes1Loren Renz, Benchm

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